Contractors can face large tax bills if the employment status is incorrect. So are your workers an employee or subcontractor? Who is an employee? Who is a subcontractor? Included are rules HMRC will use to identify an employee or subcontractor.
Employee or Subcontractor – why does it matter?
HMRC receive more in taxes if the employment status is treated as an employee. Employers don’t pay national insurance on subcontractors but they do on their employees.
For this reason alone it is in HMRC’s interest to challenge the employment status of all subcontractors in the hope that they can prove that they are employees and should be taxed as such. HMRC will backdate the taxes owed if the employment status is incorrect.
To avoid this additional tax, contractors must therefore ensure that all of their subcontractors are indeed subcontractors for tax purposes and not potentially an employee.
Employees also have more rights such as minimum wage, pensions, holiday pay, sick pay. This can be a further burden on contractors should the employment status be challenged.
Who is an employee?
An individual who works for a business is an employee if the majority of the statements below are considered true:
- Have a set number of hours e.g 9am to 5pm, 5 days a week
- Must work the hours above unless on sick leave, holiday leave, etc
- Are paid hourly, weekly, monthly or an annual rate
- Can be paid overtime
- Are paid whether there is any work or not
- The work to be done is decided by the employer (how, when, what and where)
- Must do the work themselves
- Are provided with tools, equipment, computers, etc by the employer
- The contract is open ended (after any probation period)
- Have a company email address and business cards
- Have a uniform or use company vans, etc
Who is a subcontractor?
An individual who works for a business is a subcontractor if the majority of the statements below are considered true:
- Can choose what hours they work
- They quote for contracts
- Are paid per contract, regardless of how long this takes to complete
- Work for numerous different businesses
- Can make a profit or a loss on a job by job basis
- They make the decisions on the work to be done (how, when, what and where)
- Can hire other people to do all of the work or assist them
- Provide their own tools and equipment or possibly hire them
- The contract is for a fixed period
- Have an email address and business card for their business only
- Any uniform has their name on and not the contractor. They use their own van.
Employee or subcontractor – the grey area?
HMRC will take a view on the employment status by looking at the overall picture after considering all of the factors.
As an example a more senior employee such as a manager, may have flexi-time, have some control regarding how the work is carried out and may even bring in their own personal equipment. This does not make them a subcontractor.
Still unsure whether they are an employee or subcontractor?
Most of the questions regarding employment status depend on the power dynamic.
With employer & employee relationship the power is with the employer. They decide the hours, the pay, the work to be done, how and when it’s done.
With contractor & subcontractor relationship the power is considered equal. The contractor can impose certain requirements within the contract. This would include work to be done, time frame, price, etc but the subcontractor has to agree to this. They could refuse to take on this contract.
Will the employee or subcontractor debate get worse?
The changing economy is making the tax status regarding employment more and more blurred.
Only in the last few weeks (September 2018) Pimlico Plumbers Limited were on the news as they had lost a case in the Supreme Court. An individual successfully argued that he was an employee and not self-employed. The main reason the court agreed with the individual is that he did not have any substitution rights. The contract did not allow for anyone else to carry out the work other than the individual himself.
Other cases to go before the courts soon are Uber. They argue that their taxi drivers are self-employed and therefore aren’t entitled to minimum wage, holiday pay and other employee benefits. We wait to see how the courts judge this case as it could have a major effect on all businesses which have a large subcontractor base.
Employee or subcontractor – the HMRC test
HMRC have a useful tool available which allows you to check the employment status of individuals.
The questions are completed anonymously. The result is not legally binding and HMRC don’t keep a record of the result. However it is useful to see what type of questions they ask and what you should look out for.
The taxes involved can be quite large, if HMRC can successfully win an employment status case. It is therefore important that all contractors ensure that there is no doubt whatsoever as to the employment status of all its workers.
The employee or subcontractor debate isn’t going away any time soon. In fact the more news coverage it receives with the new gig economy cases the more challenges we would expect from HMRC.
At Patterson Hall Chartered Accountants we are experts within all aspects of the Construction Industry Scheme. We have produced an ultimate guide to all things CIS with many user friendly helpsheets and examples. Take a look at our CIS Accountants guide.
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